Price Effects of International Cartels in Markets for Primary Products

John M. Connor,Purdue University

West Lafayette, Indiana, USAjconnor@purdue.edu

CUTS Symposium on Trade in Primary Products and Competition Policy,

World Trade Organization, Geneva, Switzerland, September 22, 2011

MOTIVATION• An old debate about trade and FDI policies:

Did they change the terms of trade between the rich and poor nations, 18th-20th centuries?

• New debate about whether private market power of MNCs has transferred incomes from and hindered economic development of LDCs.

• Are primary product cartels different?• Have private cartels exploited LDCs to a

greater extent than their “home” nations? • Have weak antitrust authorities contributed?

OBJECTIVE

• To analyze the extent of price changes induced by privately organized international cartels in markets for primary products

• To examine price effects of primary vs. secondary cartels across industries, geography, and time

• Link the economic harm generated by these cartels to the monetary penalties historically imposed on them by competition authorities

• Calculate the degree of deterrence of cartel violations presently achieved

DEFINITIONS• Cartel = voluntary associations of large MNCs

that explicitly collude on market prices or output to increase joint profits

• Cartel = illegal, secret joint-venture/merger• Explicit collusion = “conspiracy” = direct

communication and overt agreement• Private = not protected by sovereignty/treaty• International = Members from 2+ nations• Primary = raw materials & minimal processing

METHOD OF ANALYSIS• Cartel Overcharge CO = Pm – Pc during collusion.

• Expressed as a percentage price change: CO = ((Pm – Pc)/Pc) 100%.∙

• Primary vs. Secondary industries comparisons• Time periods reflect changes in antitrust

regimes and empirical economic analysis• Optimal deterrence is a legal-econ concept:

point where E(benefits)=E(penalties) => Penalties* = E(Benefits)/prob(detection)

DATA SOURCES

• Price-Fixing Overcharges (PFO) data set: basic information on more than two thousand published, quantitative estimates of the price changes (if any) caused by private cartels that began to operate as early as 1700

• Private International Cartels (PIC) data: a more richly detailed legal-economic compilation on about 600 contemporary international cartels punished by antitrust authorities worldwide during 21 years: January 1990 to December 2010

Primary Product Cartels

INDUSTRY DISTRIBUTION: PFONumber of Known International Cartel Episodes, by Industry, 1700-2010

Industry Year Episode Ended

1702-1919 1920-1945 1946-1989 1990-2010 Total

Primary: 33 130 42 60 265Agriculture & Forestry 0 5 0 0 5Mining 8 41 17 0 63Food & Tobacco 0 8 1 13 22Textiles 2 0 0 0 2Wood, lumber 0 0 0 0 0Chemical Fertilizers 10 23 8 42 83Primary Metals 13 53 16 5 87 Other Industries: 40 49 22 312 423Other Manufacturing 37 48 22 238 345Construction 0 0 0 13 13Transport & Communication 2 1 0 19 22

Distribution 0 0 0 11 11Other Services 1 0 0 31 32 All Industries 73 179 64 372 688 Source: John M. Connor. Price-Fixing Overcharges data spreadsheet dated May 4, 2011.

Contemporary Primary Product Cartels

Number of Contemporary Primary Product Cartels, by Industry

INDUSTRY DISTRIBUTION: PICNumber of International Cartels Detected, by Industry, 1990-2010

Industry Year Episode Ended1990-1999 2000-2010 Total

Primary: 21 78 99Agriculture & Forestry 2 8 10Mining 1 9 10Food & Tobacco 9 36 45Textiles 1 4 5Wood, lumber 0 3 3Chemical Fertilizers 8 12 20Primary Metals 0 6 6 Other Industries: 134 379 513Other Manufacturing 91 187 278Construction 12 28 40Transport & Communication 12 57 69Distribution 10 50 60Other Services 9 57 66 All Industries 155 457 612 Source: John M. Connor. Private International Cartels data spreadsheet dated June 21, 2011.

Numbers of Cartels Operating in Low Income Regions, 1990-2010

GEOGRAPHIC DISTRIBUTIONNumber of Known International Cartel Episodes, by Principal Geographic Region of Operation, 1700-2010

Region Year Episode Ended1702-1919

1920-1945

1946-1989 1990-2010 Total

North America 17 28 9 142 196EU (Multiple Member States) 4 9 11 69 93Single Nations of W. Europe 1 0 7 59 67Global (2+ Continents) 39 142 36 67 284Asia & Oceania 0 0 1 19 20Other Less Developed Regions a

1 0 0 16 17

World (All Regions) 62 179 64 372 677 Percent of World Asia, and LDCs 1% 0% 1% 9% 5% Global, Asia, and LDCs 65% 79% 58% 27% 47%Source: John M. Connor. Price-Fixing Overcharges data spreadsheet dated May 4, 2011.a)Includes episode entirely within Africa, Latin America, or Eastern Europe.

Sales of Primary Product Cartels Operating in Low Income Regions

MEDIAN CARTEL PRICE EFFECTS

PRICE EFFECTS: DISCUSSION• Cartel overcharges are declining.• Before 1946, cartel overcharges of primary

products cartels were lower (about 40%) on average than for secondary products (55%).

• But since 1945 cartel overcharges of primary products cartels are higher (38%) on average than for secondary products (25%).

• Explanations of these empirical regularities require further research.

ANTI-CARTEL ENFORCEMENT SPREADS

• Four historical phases:1907-1911: antitrust wins in US courts1920-1945: heyday of global cartels outside USA1946-1989: methods weak, penalties low1990-2011: cartels outlawed everywhere,

procedures strengthened, penalties rise• Today at least 50 antitrust authorities have

investigated international cartels, including 30 in the LDCs (Brazil, So. Africa, Korea are very active)

ANTI-CARTEL ENFORCEMENT STRONGER

• Cartel detections are up to 50+ per annum, four times faster than 20 years ago.

• Penalties are rising everywhere; disgorgement of cartel profits is now normal in US and EU, but not elsewhere

• The spread and increasing power of antitrust authorities is one cause of declining international cartel overcharges

• Yet, penalties are sub-optimal for deterrence

CONCLUDING COMMENTS

• Primary products cartels are shrinking in number and importance.

• But where they occur, the price effects are more injurious, partly because they are strongly associated with global cartels.

• Higher penalties are needed to deter. • The Primary/Secondary products distinction

for cartels is analytically useful and deserves further empirical research.